Royalties – withholding tax from April 2019

The Government announced in the Autumn Budget that it would extend the FA 2016 withholding regime to cover sales made in the UK but when the royalty payer does not have a permanent establishment (PE), or a trade, in the UK with which the royalty payment can be connected.

The new proposal will extend withholding to payments for the use or exploitation of rights over intellectual property and other intangible rights in the UK to include the right to distribute specified goods or provide specified services in the UK.

The government has published a consultation document, Royalties Withholding Tax, for comment by 23 February 2018, setting out the possible ways in which the extended regime could operate: it will come into effect in April 2019.

In essence it is designed to catch a non-resident company that makes sales in the UK but without a PE, or an avoided PE under the Diverted Profits Tax regime, in the UK and makes a royalty payment to a second, non-resident, company in respect of those UK sales.

Under existing law the royalty payment does not have a UK source so the new proposal is that the payment will be subject to a withholding tax because it is made for the exploitation of intellectual property rights in the UK. It will only apply to payments made to jurisdictions with which the UK does not have a double tax agreement or, if it does, if that treaty does not contain a non-discrimination Article.

The consultation considers what payments should be in scope. The government favours a more general approach under which any payments for rights over, or interests in, the exploitation of intellectual property and intangible assets of any description in the UK would be caught. The alternative option would be to define the specific types of payments within scope but that would require constant revision as the market evolves 

The government estimates that this new provision will bring in £800m in the four years from 2019-20 when it will come into effect.

Responses to the consultation document are requested by 23 February 2018 so if you have any thoughts, or comments, please get in touch with Ian Young so that he can incorporate these into the Tax Faculty response to the consultation. Please let Ian have your comments by 12 February 2018 at the latest.